Margin differences

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StarDust9182

I am an equities trader taking a course in futures. I asked a question that the PFGBest instructor couldn't answer and also the best real trader I know (a San Diego well-known trader) and he didn't know either. I was hoping some one here might know an answer.

What is the reason that initial margin and maintenance margin are different?

By my reasoning, margin requirements are protecting the exchange and secondly the broker against the retail trader. It is a limit on leverage which is a deadly game in the wrong hands with potential of systematic risk. So if margin (= protection) is needed then why have two different levels?

Thanks in advance for your input.
 
Thanks for the reply. I did search google for the answer before posting but didn't find anything useful.

Your suggested URL says something like: the difference allows the position to move against the trader without having to put up more money.

I find that very unsatisfying and essentially a circular argument - it is different because it is different. If a trader enters a position so close to margin that a small move results in an immediate margin call, then he should be taken out immediately. (Better yet he should just close his account and mail a cheque to the senior traders for their share!) If there was only IM then everything would work the same as it does currently with seemingly less paperwork. Wouldn't it?

Another interesting article was at http://thismatter.com/money/stocks/margin.htm

It talks about two different levels set by the FED in "Reg T" and the ability for brokers or clearing houses to change them I think. That is all true but still unsatisfying. All these articles talk about the what and not the intent behind the what.

Let's take an analogy. If I get a mortgage on a house. Why would the lender insist on fire insurance of X for day one and then I could get new fire insurance of half X from then on? Insurance of X covers both situations and is easier to manage I think. The risk of fire is the same both days isn't it?

Does anyone have any more insight for me? Is there a bigger risk for someone up the chain on day one? Is this to allow brokerages to offset after mark to market?
 
Perhaps to reduce the number of margin calls and volatility. Imagine how many margin calls would be triggered if there was "no leeway".
Inital margin is this "leeway".

If there was only 1 margin you would have 2 options:

1- Be correct 100% of the time not to have a margin call - nobody will ever be so this option does not exist in reality.

2- use less of your buying power in case it goes against you. Therefore have a margin for a margin. That's what IM is. They calculated it for you.


It is a bit hard to grasp in the beginning but makes total sense.
 
Quote from StarDust9182:

I am an equities trader taking a course in futures. I asked a question that the PFGBest instructor couldn't answer and also the best real trader I know (a San Diego well-known trader) and he didn't know either. I was hoping some one here might know an answer.

What is the reason that initial margin and maintenance margin are different?

By my reasoning, margin requirements are protecting the exchange and secondly the broker against the retail trader. It is a limit on leverage which is a deadly game in the wrong hands with potential of systematic risk. So if margin (= protection) is needed then why have two different levels?

Thanks in advance for your input.
More...

it so happens that i also have an active and funded acct with pfgbest, among three other brokerage houses.

pfgbest brokerage has NO instructor, per se.

what you described perhaps just exists in your own mind sometimes ago.... could that be so, trader?

why not try to call neil at pfgbest and see what he will say about your spurious claim....

if you do not have neil's number, pm me, i have.

besides, neil charges a very reasonable rate in futures as well, under 5 usd per roundturn....

why slander someone or some institution who can not defend itself here....?

as far as margin requirements are concerned; if anyone does not understand what initial margin is for.... and what maintenance margin is for....

then despite what a person claims to be, that person is definitely NOT ready to enter trading arena nor is the person ready to lay claim to be a trader.... at this date and time....; is my humble opinion.... this is just a general statement, not intended to mean a personal attack of any kind, ok?

despite everything else, i do wish you good trading and hopefully profitable as well.... bye.... til then....
 
Quote from nakachalet:

it so happens that i also have an active and funded acct with pfgbest, among three other brokerage houses.

pfgbest brokerage has NO instructor, per se.

what you described perhaps just exists in your own mind sometimes ago.... could that be so, trader?

why not try to call neil at pfgbest and see what he will say about your spurious claim....

if you do not have neil's number, pm me, i have.

besides, neil charges a very reasonable rate in futures as well, under 5 usd per roundturn....

why slander someone or some institution who can not defend itself here....?

as far as margin requirements are concerned; if anyone does not understand what initial margin is for.... and what maintenance margin is for....

then despite what a person claims to be, that person is definitely NOT ready to enter trading arena nor is the person ready to lay claim to be a trader.... at this date and time....; is my humble opinion.... this is just a general statement, not intended to mean a personal attack of any kind, ok?

despite everything else, i do wish you good trading and hopefully profitable as well.... bye.... til then....
More...

just to ascertain that i do have an acct with pfgbest....
 

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I accept your challenge and will PM you and then call Neil so that we can see which of the two of us is incorrect in this matter. You have 4 accounts that are fully funded so it is clear that you are very knowledgeable in this area. Perhaps you can answer the question I asked.

I don't think I slandered PFGBest by stating the truth. I have no opinion on them as a company yet since I have no account with them, but I am sure they will ask me to set one up.

I don't take any offense at all from your comments. However, I don't think you understood my question. It is troublesome that this question seems to stump the elite traders.
 
You have already been given the answer but seem unable to comprehend it. You are completely misguided by thinking that one maintenance margin number is best for retail traders and would require less work by the broker. One margin number would mean that a trader with just enough money can put on a position and the next second the market goes one tick against him and he is now out of line and should be liquidated. How in the world would that be less work? The average retail trader doesn’t know what he is doing and would constantly be getting into margin trouble. The two numbers allow the retail trader to let the market move around without the broker constantly having to step in. If you think that magically all retail traders worldwide should know they need more in their account than the minimum maintenance level when they put on a trade, then you need to come back to reality.
 
I apologize to Jgold310 for a helpful reply that I completely missed since I focused on the reply that claimed that I like to engage myself by making stuff up and posting it on trading websites. I am still thinking on that concept.

Though I didn't say it directly, I was actually thinking that IM would be best, safest, and easiest at all times for retail clients. That way they would lose less money than using MM. That leads them into the ways of sin and is more likely IMO to lose more money for them over the long term.

The brokerage house wants the lowest margin possible to draw out the most traders and they make the most money off of commissions so they don't want to burn beginning traders. They want them to stay in the game since they are providing lots of the cash in a mark-to-market system. If they used IM for anyone who was new to trading and MM for the most experienced traders, that would serve the retail and pros and brokerage and exchanges best I think.

Thanks for your short and sweet reply opt789. I appreciate it. I have two questions into my teacher (with email address ????@pfgbest.com ) based on it. One is if you would be liquidated instantly using IM entry when one tick moved against you in a mark-to-market system. Your reply is surprising so I have clarified it with my instructor.

The other is how you minimize brokerage troubles if someone is day trading. Day trading is riskier in the hands of retail traders I suspect.

Good replies. Thank you.
 
To close the loop. I now understand why there is a difference between the two margins. Thanks very much for the PMs and comments. Perhaps I can return the favor someday.

To my heckler Nakachalet and the mythical Neil: For some reason you have chosen not to respond to my PM. I am not surprised. I must admit you really surprised me as to why someone with no clue about the subject would write in. I will wait for your PM apology to me and the other readers, if you have any class at all (no pun intended).

I try (sheesh I am human) to live by a rule I used to tell my friends: When you know what you are talking about, speak up; when you don't know what you are talking about shutup and you will soon be thought of as wise beyond measure. Apparently I have some ways to go yet ...

A simple google search will lead to:
<UURL>http://www.pfgbest.com/education/introtofutures/<UURL>
and under the research education menu is the intro to futures which I am taking.

My only link with them is as a student so I can't judge the quality of their offerings other than to say I am enjoying my course and my instructor immensely although that my change with my midterm test in a week!
 
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